Terminating a building contract

In 2015, the council terminated its agreement with a contractor, Thomas Barnes & Sons, after a bus station build it commissioned was subject to significant cost increases and project delays.

Shortly after termination, the contractor went into administration, citing the council’s failure to pay and the invalid termination of the building contract as the cause. Thomas Barnes & Sons claimed nearly £1.8m for works carried out and damages, including loss of profit, for wrongful termination.

It alleged that the council had no right to terminate the contract in the manner it did and that it had failed to follow the proper process.

The contractor relied on established law that terminating without following an agreed process amounts to a repudiatory breach. However, the court decided in favour of the council, principally on the basis that delays by the contractor amounted to a repudiatory breach. This made the council’s failure to follow the process in the contract for termination irrelevant.

The decision highlights two particular pitfalls in terminating building contracts. Employers must justify contractual termination by reference to the contract, and the occurrence of delay alone may not give cause to this.

It is vital that the correct procedure is followed. This will often conflict with the employer’s urgent requirements to engage a replacement contractor to complete the works.

Careful attention should be given to drafting termination provisions so they meet commercial requirements. Clauses permitting termination for convenience do not appear in all published standard form building contracts, and the addition of such provisions would go some way to avoiding a repudiatory breach – and costly litigation.

Stuart Wilson is a construction and engineering partner at law firm gunnercooke